SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended June 30, 1995 Commission File Number: 0-3676 VSE CORPORATION (Exact Name of Registrant as Specified in its Charter) DELAWARE 54-0649263 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 2550 Huntington Avenue Alexandria, Virginia 22303-1499 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code (703) 960-4600 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.05 per share (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was re- quired to file such reports), and (2) has been subject to such filing require- ments for the past 90 days. Yes [x] No [ ] Number of shares of Common Stock outstanding as of August 1, 1995: 869,167. VSE Corporation and Subsidiaries Consolidated Financial Statements (Unaudited) Consolidated Balance Sheets (in thousands, except per share amounts)
June 30, December 31, 1995 1994 _______ _______ Assets Current assets: Cash and cash equivalents . . . . . . . . . . . . . . $ 1,286 $ 3,124 Accounts receivable, principally U. S. Government . . . . . . . . . . . . . . . . . . 11,973 10,922 Deferred tax assets . . . . . . . . . . . . . . . . . 1,259 1,491 Other current assets . . . . . . . . . . . . . . . . . 1,106 858 _______ _______ Total current assets . . . . . . . . . . . . . . . . 15,624 16,395 Property and equipment, net . . . . . . . . . . . . . . 2,912 3,078 Deferred tax assets . . . . . . . . . . . . . . . . . . 0 248 Intangible assets . . . . . . . . . . . . . . . . . . . 2,437 102 Other assets . . . . . . . . . . . . . . . . . . . . . . 1,787 1,449 _______ _______ Total assets . . . . . . . . . . . . . . . . . . . . $22,760 $21,272 ======= ======= Liabilities and Stockholders' Investment Current liabilities: Accounts payable and other current liabilities . . . . $ 1,761 $ 2,485 Accrued expenses . . . . . . . . . . . . . . . . . . 6,351 5,661 Accrued income taxes . . . . . . . . . . . . . . . . . 212 70 Dividends payable . . . . . . . . . . . . . . . . . . 69 69 _______ _______ Total current liabilities . . . . . . . . . . . . . 8,393 8,285 Long-term debt . . . . . . . . . . . . . . . . . . . . . 74 0 Deferred tax liability . . . . . . . . . . . . . . . . . 392 0 Deferred compensation . . . . . . . . . . . . . . . . . 1,136 886 _______ _______ Total liabilities . . . . . . . . . . . . . . . . . 9,995 9,171 _______ _______ Commitments and contingencies Stockholders' investment: Common stock, par value $.05 per share, authorized 5,000,000 shares; issued 1,948,044 shares . . . . . 97 97 Paid-in surplus . . . . . . . . . . . . . . . . . . . 8,247 8,247 Retained earnings . . . . . . . . . . . . . . . . . . 20,615 20,042 Treasury stock, at cost (1,078,877 shares) . . . . . . (16,194) (16,285) _______ _______ Total stockholders' investment . . . . . . . . . . . 12,765 12,101 _______ _______ Total liabilities and stockholders' investment . . . $22,760 $21,272 ======= =======
VSE Corporation and Subsidiaries Consolidated Financial Statements (Unaudited) Consolidated Statements of Income For the three and six months ended June 30, (in thousands, except per share amounts)
1995 1994 _________________ _________________ Three Six Three Six Months Months Months Months _______ _______ _______ _______ Revenues, principally from contracts . . $17,110 $33,265 $16,290 $33,769 Costs and expenses of contracts . . . . . 16,687 31,964 15,665 32,215 _______ ______ ______ ______ Gross profit . . . . . . . . . . . . . . 423 1,301 625 1,554 Selling, general and administrative expenses . . . . . . . . . . . . . . . (62) 151 34 376 Interest expense . . . . . . . . . . . . 8 12 6 11 _______ _______ _______ _______ Pretax income . . . . . . . . . . . . . . 477 1,138 585 1,167 Provision for income taxes . . . . . . . 180 427 231 460 _______ _______ _______ _______ Net income . . . . . . . . . . . . . . . $ 297 $ 711 $ 354 $ 707 ======= ======= ======= ======= Earnings per common share, based on weighted average shares outstanding: $ .34 $ .82 $ .41 $ .82 ======= ======= ======= ======= Weighted average shares outstanding 864,667 864,024 863,167 863,167 ======= ======= ======= =======
VSE Corporation and Subsidiaries Consolidated Financial Statements (Unaudited) Consolidated Statements of Stockholders' Investment (in thousands)
Common Stock Paid-In Retained Treasury Shares Amount Surplus Earnings Stock _______ ______ _______ _______ ________ Balance at December 31, 1993 . . 1,948 $97 $8,247 $18,757 $(16,285) Net income for the year. . . . . -- -- -- 707 -- Dividends declared ($.15). . . . -- -- -- (129) -- ______ ____ ______ _______ ________ Balance at June 30, 1994 . . . . 1,948 $97 $8,247 $19,335 $(16,285) ====== ==== ====== ======= ======== Balance at December 31, 1994 . . 1,948 $97 $8,247 $20,042 $(16,285) Net income for the year. . . . . -- -- -- 711 -- Dividends declared ($.16). . . . -- -- -- (138) -- Issuance of Treasury Stock . . . -- -- -- -- 91 ______ ____ ______ _______ ________ Balance at June 30, 1995 . . . . 1,948 $97 $8,247 $20,615 $(16,194) ====== ==== ====== ======= ========
VSE Corporation and Subsidiaries Consolidated Financial Statements (Unaudited) Consolidated Statements of Cash Flows For the six months ended June 30, (in thousands)
1995 1994 _______ _______ Cash flows from operating activities: Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 711 $ 707 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization . . . . . . . . . . . . . . 715 545 (Gain) on sale of property and equipment . . . . . . . . (3) (14) Deferred compensation plan expense . . . . . . . . . . . 63 0 Change in assets and liabilities - (Increase) decrease in: Accounts receivable . . . . . . . . . . . . . . . . . . (1,051) 5,750 Intangible assets . . . . . . . . . . . . . . . . . . (2,335) 30 Other current assets and noncurrent assets . . . . . . (586) (215) Deferred tax assets . . . . . . . . . . . . . . . . . . 480 (425) Increase (decrease) in: Accounts payable and other current liabilities . . . . . . . . . . . . . . . . . . . . . (628) (1,295) Accrued expenses. . . . . . . . . . . . . . . . . . . . 690 305 Accrued and deferred taxes . . . . . . . . . . . . . . 142 (37) Deferred tax liability . . . . . . . . . . . . . . . . 392 0 _______ _______ Net cash (used in) provided by operations . . . . . . (1,410) 5,351 _______ _______ Cash flows from investing activities: Purchase of property and equipment, (net of dispositions). . . . . . . . . . . . . . . . . . . (546) (203) Issuance of treasury shares . . . . . . . . . . . . . . . . 91 0 _______ _______ Net cash used in investing activities . . . . . . . . . . (455) (203) _______ _______ Cash flows from financing activities: Proceeds from (payments of) long-term debt . . . . . . . . 71 (2,684) Cash dividends paid . . . . . . . . . . . . . . . . . . . . (138) (129) Proceeds from (payments of) deferred compensation . . . . . . . . . . . . . . . . . . . . . . 94 (99) _______ _______ Net cash provided by (used in) financing activities . . . 27 (2,912) _______ _______ Net increase (decrease) in cash and cash equivalents . . . . (1,838) 2,236 Cash and cash equivalents at beginning of year. . . . . . . 3,124 1,032 _______ _______ Cash and cash equivalents at end of year. . . . . . . . . . $ 1,286 $ 3,268 ======= =======
VSE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidated Financial Statements Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 1995 are not necessarily indicative of the results that may be expected for the year ended December 31, 1995. For further information refer to the consolidated financial statements and footnotes thereto included in the VSE Corporation annual report on Form 10-K for the year ended December 31, 1994. (1) Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include VSE Corporation ("VSE" or the "company"), Value Systems Services ("VSS"), Human Resource Systems, Inc. ("HRSI"), Schmoldt Engineering Services ("Schmoldt Engineering"), VSE Corona, Inc. ("VCI"), VSE Services Corporation ("VSES"), and CMstat Corporation ("CMstat"). All significant intercompany transactions have been eliminated in consolidation. Certain prior year balances have been restated for comparative purposes. (2) CMstat Corporation Acquisition On May 31, 1995 the company acquired all of the outstanding stock of CMstat Corporation, a leading developer and supplier of commercial off-the-shelf configuration and product data management solutions, for approximately $970 thousand in cash. CMstat designs, manufactures, and supports the software developed for commercial and government customers. The acquisition was accounted for by the purchase method of accounting. The results of operations for the period May 31, 1995 through June 30, 1995 and the balance sheets as of June 30, 1995 are included in these financial statements. The company has recorded intangible assets of $2.4 million allocating approximately $400 thousand of Goodwill , $1.2 million of intangible assets and $800 thousand of deferred taxes thereon. These allocations are based on preliminary estimates by management. The allocations to intangible assets may be revised at a later date, however, the impact of the differences, if any, in the final allocations are not expected to have a material impact on the financial statements. Goodwill and intangible assets are being amortized by the straight-line method over periods from seven to ten years. VSE CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following table sets forth certain items, including consolidated revenues, pretax income, and net income and the amount of changes of such items for the three and six month periods ended June 30, 1995 and 1994 (in thousands).
Three Months Six Months 1995 Compared to 1994 Ended June 30 Ended June 30 Three Six 1995 1994 1995 1994 Months Months _______ _______ _______ _______ _______ _______ Revenues, principally from contracts . . . $17,110 $16,290 $33,265 $33,769 $ 820 $ (504) ======= ======= ======= ======= ====== ======= Pretax income . . . . $ 477 $ 585 $ 1,138 $ 1,167 $ (108) $ (29) Provision for income taxes . . . . 181 231 427 460 (150) (33) _______ _______ _______ _______ ______ ______ Net income . . . . . . $ 296 $ 354 $ 711 $ 707 $ (58) $ 4 ======= ======= ======= ======= ====== =======
RESULTS OF OPERATIONS The results of operations includes the operations of VSE Corporation ("VSE" or the "company"), Value Systems Services ("VSS"), Human Resource Systems, Inc. ("HRSI"), Schmoldt Engineering Services Company ("Schmoldt Engineering"), VSE Corona, Inc. ("VCI"), VSE Services Corporation ("VSES"), all of which operate principally in the engineering, development, testing, and management services industry, and CMstat Corporation ("CMstat"), acquired in May of 1995, which operates in the software development industry. Intercompany sales are principally at cost. Revenues for the three month period ending June 30, 1995 increased by about 5% compared to the same period of 1994. The increase in revenues is primarily due to an increase in the level of services performed by VSS associated with the VSS Navy contract. (See the discussion about the "VSS Contract" below.) The in- crease in revenues for the period was offset by decreases in the level of services performed by VSE and Schmoldt Engineering. Pretax income for the three month period ended June 30, 1995 decreased compared to the same period of 1994. The decrease in pretax income is primarily due to costs associated with the acquisition and initial month of activity of CMstat in May of 1995 and a decrease in profits associated with the lower revenue levels of Schmoldt Engineering. Revenues and pretax income for the six month period ending June 30, 1995 remained substantially unchanged compared to the same period of 1994. The largest customer for the engineering services rendered by the company is the U. S. Department of Defense ("Defense"), including agencies of the U. S. Army, Navy, and Air Force. The Defense budget has been restrained by the federal budget deficit in recent years, and as a result of this and increased competi- tion, VSE's engineering services revenues have decreased from the levels attained in prior years. There can be no assurance that future reductions in the Defense budget will not have a materially adverse impact on the company's revenues, results of operations, and financial position. VSE CORPORATION Management Discussion and Analysis Substantially all of the company's revenues from continuing operations depend on the exercise of option periods and the satisfaction of incremental funding requirements on current contracts, on current contracts not being terminated for the convenience of the Government, and on the incremental funding requirements on current contracts. In 1995 and 1994 the company did not experience any termination of contracts for the convenience of the Government or any non- exercise of option periods on current contracts which were material to the company's business. Additional revenues from acquisitions such as CMstat are options the company continues to pursue. VSE Contract. VSE has a contract with the U. S. Navy which accounted for approximately 18% of consolidated revenues for the six month period ended June 30, 1995. This contract was scheduled to expire in September 1992, but has been extended through September 1995. The Navy has announced that it intends to combine the work performed under this contract with other related work, and VSE has been informed that it was not the successful bidder for the proposed new contract. The inability to predict whether VSE will obtain further extensions of its current Navy contract or will be awarded other contracts to replace this work is a known uncertainty which could have a material adverse effect on future revenues, profits, and financial position. VSS Subcontract. In October 1991 VSS was awarded a subcontract to provide certain services in connection with a U. S. Marine Corps contract. Services under the subcontract commenced in January 1992. The subcontract generated revenues to VSS, equal to about 11% of VSE's consolidated revenues for the six month period ended June 30, 1994. A protest against the award of the prime contract was sustained by the General Accounting Office (GAO) in February 1992, and in October 1993, a new prime contract was awarded to a different contractor. A protest of the new award was denied and substantially all work on the VSS subcontract terminated effective April 23, 1994. There is no revenue associated with this subcontract during 1995. VSS Contract. In February 1994 VSS was awarded a new contract with a U. S. Navy customer. The award of this contract was protested and performance was suspended during the protest period. The protest was denied in September 1994 and VSS began work on the contract immediately thereafter. The contract generated revenues to VSS equal to approximately 13% of consolidated revenues during the six month period ended June 30, 1995. Liquidity and Capital Resources The company's principal requirements for cash are to finance the costs of operations pending the collection of accounts receivable, to acquire capital assets for office and computer support, and to pay cash dividends. As of June 30, 1995, VSE had no borrowings outstanding under its $8 million bank loan. Management believes that the cash flows from operations and available bank loan commitments are adequate to meet current operating cash requirements. VSE CORPORATION AND SUBSIDIARIES Management's Discussion and Analysis VSE's requirements for working capital are affected significantly by its revenues and accounts receivable, which arise primarily from billings made by the company to the U. S. Government or other prime contractors for services ren- dered. Such accounts receivable generally do not present liquidity or collec- tion problems. Working capital is also affected by (a) contract retainages, (b) start-up and termination costs associated with new or complete contracts, (c) capital equipment requirements, and (d) differences between the provisional billing rates authorized by the government compared to the costs actually incurred by the company. Government contracts generally require VSE to pay for material and subcontract costs included in VSE's contract billings prior to receiving payment for such costs from the Government. However, such contracts generally provide for progress payments on a monthly or semimonthly basis, thereby reducing require- ments for working capital. Cash dividends were declared at $.16 per share during the six month period ended June 30, 1995. Pursuant to its bank loan agreement, the payment of cash dividends by VSE may not exceed an annual rate of $.60 per share. VSE has paid cash dividends each year since 1973. Inflation and Pricing Policy Most of the contracts performed by VSE provide for estimates of future labor costs to be escalated for any future option periods provided by the contracts, while the non-labor costs included in such contracts are normally considered reimbursable at the then current cost. VSE property and equipment consists principally of computer systems equipment and furniture and fixtures. The over- all impact of inflation on replacement costs of such property and equipment is expected to be insignificant. VSE CORPORATION AND SUBSIDIARIES PART II. Other Information Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. None (b) Reports on Form 8-K. No current reports on Form 8-K were filed by the Registrant during the six month period ended June 30, 1995. Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has omitted all other items contained in "Part II. Other Information" because such other items are not applicable or are not required if the answer is negative or because the information required to be reported therein has been previously reported. VSE CORPORATION AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the under- signed thereunto duly authorized. VSE CORPORATION Date: August 14, 1995 C. S. Weber C. S. Weber, Senior Vice President, Secretary and Treasurer (Principal Financial Officer) Date: August 14, 1995 T. J. Corridon T. J. Corridon, Vice President and Director of Accounting (Principal Accounting Officer) The financial information included in this report reflects all known adjustments normally determined or settled at year-end which are, in the opinion of manage- ment, necessary to a fair statement of the results for the interim periods. The accompanying note to consolidated financial statements are an integral part of this report.